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36) Educational expenses incurred by a CPA for courses necessary to meet continuing education requirements are fully deductible.
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50) The maximum tax deductible contribution to a traditional IRA in 2012 is $5,000 ($6,000 for a taxpayer age 50 or over).
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8) The deduction for unreimbursed transportation expenses for employees is subject to the 2% of AGI floor.
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30) A gift from an employee to his or her superior does not qualify as a business gift.
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24) If an employee incurs business-related entertainment expenses that are fully reimbursed, it is the employer who is subject to the 50% limitation.
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3) Unreimbursed employee business expenses are deductions from AGI.
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18) Commuting to and from a job location is a deductible expense.
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7) Personal travel expenses are deductible as miscellaneous itemized deductions subject to the 2% of AGI floor.
Answer: FALSE Explanation: Personal travel expenses are not deductible.
93) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2010. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin stock. The option itself does not have a readily ascertainable FMV. Caroline exercised the option on August 1, 2012 when the stock's FMV was $250. If Caroline sells the stock on September 5, 2013 for $300 per share, she must recognize
A) 2012 $100,000 ordinary income 2013 $50,000 LTCG Explanation: A) On the exercise date, the employee recognizes ordinary income equal to the spread between the FMV and the option price. Any future appreciation in value is capital gain recognized at the
62) Gayle, a doctor with significant investments in the stock market, traveled on a cruise ship to Bermuda. Investment specialists provided daily seminars which Gayle attended. The cost of the cruise for four days is $2,500. Gayle can deduct (before application of any floors)
A) $0. Explanation: A) None of the travel expenses are deductible because the expenses are related to income-producing activities under Section 212 and are not related to Gayle's trade or business.
70) Brett, an employee, makes the following gifts, none of which are reimbursed: Brett's supervisor $30 Brett's secretary 40 4 customers ($27 each) 108 Gift wrapping customer gifts 10 What amount of the gifts is deductible before application of the 2% of AGI floor for miscellaneous itemized deductions?
A) $135 Explanation: A) $25 (secretary) + $100 (4 × $25 for customers) + $10 = $135. The gift to the supervisor is not deductible. Deductible gifts are limited to $25 per donee plus wrapping.
69) Joe is a self-employed tax attorney who frequently entertains his clients at his country club. Joe's club expenses include the following: Annual dues $ 5,400 Initiation fees 1,200 Charges for personal meals with his family 3,100 Meal and entertainment charges related to business use 4,000 Assuming the business meals and entertainment qualify as deductible entertainment expenses, Joe may deduct
A) $2,000. Explanation: A) He gets no deduction for the dues, initiation, or the personal meals. Business meals are 50% deductible. ($4000 × .50) = $2,000
56) West's adjusted gross income was $90,000. During the current year he incurred and paid the following: Publications (unreimbursed and related to employment) $2,000 Tax return preparation fee 1,000 Dues to professional organizations 1,500 Fees for will preparation (no tax advice) 800 Life insurance premiums 1,400 Assuming he can itemize deductions, how much should West'claim as miscellaneous itemized deductions (after limitations have been applied)?
A) $2,700 Explanation: A) The first three items are deductible—$2,000 + $1,000 + $1,500 = $4,500. The floor is $1,800 (.02 × $90,000), leaving a deduction of $2,700.
61) Norman traveled to San Francisco for four days on vacation, and while there spent another two days conducting business for his employer. Norman's plane fare for the trip was $500; meals cost $150 per day; hotels cost $300 per day; and a rental car cost $150 per day that was used for all six days. Norman was not reimbursed by his employer for any expenses. Norman's AGI for the year is $40,000 and he did not have any other miscellaneous itemized deductions. Norman may deduct (after limitations)
A) $250. Meals ($150 × 2) $ 300 Minus: 50% of meals ( 150) $150 Hotels ($300 × 2) 600 Rental car ($150 × 2) 300 Total expenses $1,050 Minus: 2% of $40,000 (800) Deductible expenses $ 250
76) Ron obtained a new job and moved from Houston to Washington. He incurred the following moving expenses: Transportation of household goods $3,200 House-hunting trips 1,500 Temporary living expenses (20 days) 3,400 Commissions on new lease 500 Costs of settling old lease 250 Mileage for personal automobile 1,400 miles Assuming Ron is eligible to deduct his moving expenses, what is the amount of the deduction?
A) $3,522 Explanation: A) Direct expenses: Transportation of goods $3,200 Mileage (1,400 × .23) 322 Deductible moving expenses $3,522
71) Steven is a representative for a textbook publishing company. Steven attends a convention which will also be attended by many potential customers. During the week of the convention, Steven incurs the following costs in entertaining potential customers. Meal costs $ 1,500 Entertainment of customers 3,500 Having recently been to a company seminar on the new tax laws, Steven makes sure that business is discussed at the various dinners, and that the entertainment is on the same day as the different dinners. Steven is reimbursed $2,000 by his employer under an accountable plan. Steven's AGI for the year is $50,000, and while he itemizes deductions, he has no other miscellaneous itemized deductions. What is the amount and character of Steven's deduction after any limitations?
A) $500 from AGI Explanation: A) Since there was an accountable plan, no amount is included in income. Excess costs are deducted from AGI as a miscellaneous itemized deduction. The excess expenses are first subject to the 50% limitation and then subject to the 2% nondeductible floor. Eligible expenses ($5,000 - $2,000) × 0.50 $1,500 Minus: 2% of AGI 1,000 Deduction from AGI $ 500
60) Gwen traveled to New York City on a business trip for her employer. Gwen spent 4 days in business meetings and conferences and then spent 2 days sightseeing in the area. Gwen's plane fare for the trip was $250. Meals cost $160 per day. Hotels and other incidental expenses amounted to $250 per day. Gwen was not reimbursed by her employer for any expenses. Her AGI for the year is $50,000 and she itemizes but has no other miscellaneous itemized deductions. Gwen may deduct (after limitations)
A) $570. Plane fare $ 250 Meals ($160 × 4) $640 Minus: 50% of meals cost (320) 320 Hotels ($250 × 4) 1,000 Subtotal $1,570 Minus: 2% of $50,000 AGI ( 1,000) Deductible expenses $570
73) Donald takes a new job and moves to a new residence. The distances are as follows: Old residence to new job 70 miles Old residence to old job 8 miles By how many miles does the move exceed the minimum distance requirement for the moving expense deduction?
A) 12 miles Explanation: A) 70 - 8 = 62 old commute - 50 required incremental miles in qualifying move = 12 excess miles in move.
52) A contributor may make a deductible contribution to a Coverdell Education Savings Account for a qualified designated beneficiary of up to $2,000 in 2012.
Answer: FALSE Explanation: Contributions to CESAs are not tax deductible.
55) Which of the following statements regarding independent contractors and employees is true (ignore temporary provisions)?
A) Independent contractors pay Social Security and Medicare tax of 15.3%. Explanation: A) Independent contractors are responsible for their own Social Security taxes and Medicare taxes which are paid as a "self employment" tax in addition to income taxes.
97) Which of the following is true about H.R.10 (Keogh) plans?
A) The plan must be established before the end of the tax year, and contributions must be made before the due date of the tax return, plus extensions. Explanation: A) While an H.R. 10 plan must be established before the end of the tax year, contributions may be made up to the due date for the tax return (including extensions).
90) Mirasol Corporation granted an incentive stock option to employee Josephine on January 1, 2011. The option price was $150 and the FMV of the Mirasol stock was also $150 on the grant date. The option allowed Josephine to purchase 160 shares of Mirasol stock. Josephine exercised the option on August 1, 2012 when the stock's FMV was $250. Unless otherwise stated, assume Josephine is a qualifying employee. The results of the above transactions to Mirasol Corporation will be
A) no compensation deduction. Explanation: A) Mirasol Corporation is not entitled to a compensation deduction in any year.
89) Wilson Corporation granted an incentive stock option to Reva on January 1, two years ago. The option price was $300, and the FMV of the Wilson stock was also $300 on the grant date. The option allowed Reva to purchase 150 shares of Wilson stock. Reva exercised the option on August 1, this year, when the stock's FMV was $400. Unless otherwise stated, assume Reva is a qualifying employee. The results of the above transactions to Reva will be
A) no income to Reva on the grant date or exercise date but there is an alternative minimum tax adjustment item to Reva of $15,000. Explanation: A) While no income is recognized on the grant date or the exercise date, $15,000 [($400 - $300) × 150 shares] is an adjustment for the AMT.
37) Educational expenses incurred by a bookkeeper for courses necessary to sit for the CPA exam are fully deductible.
Answer: FALSE Explanation: Expenses are not deductible if the education is required to meet minimum educational requirements for a new trade or business (or employment activity).
53) All taxpayers are allowed to contribute funds to Health Savings Accounts to supplement their health insurance.
Answer: FALSE Explanation: Only taxpayers covered by high-deductible health plans can contribute funds to an HSA.
49) A sole proprietor establishes a Keogh plan. The highest effective percentage of earned income she can contribute is 25 percent.
Answer: FALSE Explanation: Due to the effect of reducing the earned income base by one-half of self-employment tax and the contribution itself, the permissable 25% contribution is reduced to an effective 20% contribution rate.
34) Deductible moving expenses include the cost of moving household goods and personal effects as well as temporary living expenses.
Answer: FALSE Explanation: Temporary living expenses are not deductible as a moving expense.
21) If the standard mileage rate is used in the first year, the actual expense method may not be used in future years.
Answer: FALSE Explanation: A taxpayer can switch to the actual cost method, but basis adjustments are required.
11) According to the IRS, a person's tax home is the location of the family residence regardless of the location of the taxpayer's principal place of employment.
Answer: FALSE Explanation: According to the IRS, a taxpayer's home is his principal place of employment.
27) Dues paid to social or athletic clubs are deductible if they meet a primary-use test, requiring that more than 50% of the use of the facility be for business purposes.
Answer: FALSE Explanation: Club dues are not deductible.
40) In-home office expenses for an office used by the taxpayer for administrative or management activities of the taxpayer's trade or business are never deductible.
Answer: FALSE Explanation: Such expenses are deductible if there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business.
22) A taxpayer goes out of town to a business convention. The 50% reduction applies to the cost of food, entertainment and transportation expenses.
Answer: FALSE Explanation: The 50% reduction does not apply to transportation expenses.
47) Corporations issuing incentive stock options receive a tax deduction for compensation expense.
Answer: FALSE Explanation: The employer foregoes the compensation expense deduction when it issues incentive stock options.
33) Kim currently lives in Buffalo and works in Rochester, a 60-mile commute each way. Kim accepts a new job in a town outside of Rocherster, and the new commute is 75-miles each way. Kim decides the commute for the new job is too long, and she moves to Rochester. Kim is eligible to deduct her moving expenses
Answer: FALSE Explanation: The new commute must be at least 50 miles further than the old commute (110 miles in this case).
28) Generally, 50% of the cost of business gifts is deductible up to $25 per donee per year.
Answer: FALSE Explanation: There is no 50% reduction for the deduction of business gifts.
25) If a meeting takes place at a sporting event or night club, the entertainment can not be "directly related" and, thus, can not be deductible.
Answer: FALSE Explanation: To be deductible, entertainment must be either "directly related" expenses or "associated with" expenses.
20) Taxpayers may use the standard mileage rate method when five vehicles are used simultaneously for business.
Answer: FALSE Explanation: When multiple vehicles are used simultaneously for business, the standard mileage method is only allowed when four or fewer vehicles are in service.
45) Under a qualified pension plan, the employer's deduction is usually deferred until the employee recognizes income.
Answer: FALSE Explanation: A qualified plan will allow the employer an immediate deduction.
51) The maximum tax deductible contribution to a Roth IRA in 2012 is $5,000 ($6,000 for a taxpayer age 50 or over).
Answer: FALSE Explanation: Contributions to Roth IRAs are not tax deductible.
9) If an individual is not "away from home," expenses related to local transportation are never deductible.
Answer: FALSE Explanation: Such expenses may be classified as deductible transportation expenses.
26) "Associated with" entertainment expenditures generally must occur on the same day that business is discussed.
Answer: TRUE Explanation: The entertainment must directly precede or follow a bona fide business discussion, i.e., entertainment and business discussion generally must occur on the same day.
68) Austin incurs $3,600 for business meals while traveling for his employer, Tex, Inc. Austin is reimbursed in full by Tex pursuant to an accountable plan. What amounts can Austin and Tex deduct?
Austin $0 Tex $1,800 Explanation: A) The taxpayer who ultimately pays the expenses is subject to the 50% cutoff. $3,600 × .50 = $1,800.
67) Sarah incurred employee business expenses of $5,000 consisting of $3,000 business meals and $2,000 customer entertainment. She provided an adequate accounting to her employer's accountable plan and received reimbursement for one-half of the total expenses. How much of the meals and entertainment will be deductible by Sarah without consideration of the 2% of AGI limit?
B) $1,250 Explanation: B) $3,000 + $2,000 = $5,000 total expenses × .50 reimbursed = $2,500 unreimbursed × .50 = $1,250.
94) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2010. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin stock. The option itself does not have a readily ascertainable FMV. Caroline exercised the option on August 1, 2012 when the stock's FMV was $250. Caroline sells the stock on September 5, 2013 for $300 per share. Martin Corporation will be allowed a deduction of
B) $100,000 in 2012. Explanation: B) The employer is allowed a deduction equal to the employee income recognized on the exercise date (i.e. the spread between the FMV at exercise and the exercise price).
63) Chelsea, who is self-employed, drove her automobile a total of 20,000 business miles in 2012. This represents about 75% of the auto's use. She has receipts as follows: Parking (business only) $500 Tolls (business only) 200 Repairs $1,000 Chelsea has an AGI for the year of $50,000. Chelsea uses the standard mileage rate method. After
B) $11,800. Explanation: B) (20,000 miles × .555) + $500 parking + $200 tolls = $11,800. The cost of repairs would not be added to the standard mileage method. Chelsea is self-employed so the 2% of AGI floor does not apply.
57) Allison, who is single, incurred $4,000 for unreimbursed employee expenses, $10,000 for mortgage interest and real estate taxes on her home, and $500 for investment counseling fees. Allison's AGI is $80,000. Allison's allowable deductions from AGI are (after limitations have been applied)
B) $12,900 Explanation: B) Only the mortgage interest and taxes are allowable deductions not subject to the 2% floor. Unreimbursed employee expenses and investment fees are miscellaneous itemized deductions subject to the 2% nondeductible floor. $10,000 + [(4,000 + $500) - $1,600] = $12,900.
75) Bill obtained a new job in Boston. He incurred the following moving expenses: Transportation of household goods and personal effects $2,600 Cost of transporting Bill's family 2,000 House-hunting trip 1,700 Payments to lessor to cancel a lease 500 Assuming Bill is entitled to deduct moving expenses, what is the amount of the deduction?
B) $4,600 Explanation: B) Direct expenses: Transportation of household goods $2,600 Cost of transporting Bill's family 2,000 Deductible moving expenses $4,600
95) Frank is a self-employed CPA whose 2012 net earnings from his trade or business (before the H.R. 10 plan contribution but after the deduction for one-half of self-employment (taxes) is $240,000. What is the maximum contribution that Frank can make on his behalf to his H.R. 10 (Keogh) plan in 2012?
B) $48,000 Explanation: B) The maximum earned income to be considered is $250,000. The maximum contribution is the lesser of $50,000 or 25% of the earned income from self-employment activities after taking the Keogh deduction into account. To achieve this result, the formula is reduced to 20%; thus, the maximum amount in this problem is the lesser of $50,000 or $48,000 ($240,000 × .20).
66) Jordan, an employee, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows: Gasoline and repairs $7,000 Insurance B) $500 Explanation: B) ($7,000 + $1,000 + $4,000) × 15,000/20,000 = $9,000. $9,000 - (15,000 × .50) - (2% × $50,000) = $500. Jordan is an employee so qualifying expenses after reduction for reimbursement are limited by the 2% of AGI floor. 1,000 Depreciation 4,000 Jordan submitted appropriate reports to his employer, and the employer paid a reimbursement of $ .50 per mile. Jordan has used the actual cost method in the past. Jordan's AGI is $50,000. What is Jordan's deduction for the use of the auto after application of all relevant limitations?
B) $500 Explanation: B) ($7,000 + $1,000 + $4,000) × 15,000/20,000 = $9,000. $9,000 - (15,000 × .50) - (2% × $50,000) = $500. Jordan is an employee so qualifying expenses after reduction for reimbursement are limited by the 2% of AGI floor.
65) Rajiv, a self-employed consultant, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows: Gasoline and repairs $7,000 Insurance 1,000 Depreciation 4,000 Rajiv's AGI is $100,000 before considering the auto costs. Rajiv has used the actual cost method in the past. What is Rajiv's deduction for the use of the auto after application of all relevant limitations?
B) $9,000 Explanation: B) ($7,000 + $1,000 + $4,000) × 15,000/20,000. Rajiv is self-employed so the 2% of AGI floor does not apply.
79) The following individuals maintained offices in their home: (1) Dr. Austin is a self-employed surgeon who performs surgery at four hospitals. He uses his home for administrative duties as he does not have an office in any of the hospitals. (2) June, who is a self-employed plumber, earns her living in her customer's homes. She maintains an office at home where she bills clients and does other paperwork related to her plumbing business. (3) Cassie, who is an employee of Montgomery Electrical, is provided an office at the work but does significant administrative work at home. Her employer does not require her to do extra work but she feels it is necessary. Who is entitled to a home office deduction?
B) Dr. Austin and June Explanation: B) Only Dr. Austin and June get deductions. In order for an employee, Cassie, to take the deduction, the office in home must be for the convenience of her employer in addition to the other requirements.
78) All of the following may deduct education expenses except
B) Paige is an accountant who incurs expenses to take a CPA exam review course. Explanation: B) None of Paige's expenses are deductible because they are incurred to meet the minimum educational standards for qualification in her accounting position.
74) In which of the following situations is the taxpayer not allowed a deduction for moving expenses? A) Pam moves from Phoenix to Los Angeles to take a new job. She works at the Los Angeles job for 45 weeks before starting a new job in Las Vegas.
B) Paul moves from Boston to Miami to start a new business selling t-shirts. The business is not successful and Paul returns to Boston after 52 weeks. Explanation: B) Paul does not meet the 78 weeks of residence requirement applicable to self-employed taxpayers.
87) Tobey receives 1,000 shares of YouDog! stock as part of his compensation package. Tobey's employment contract with YouDog!, Inc. states that if he leaves before completion of three years of employment, he will forfeit the stock. The stock currently has a fair market value of $12 per share. Which of the following statements regarding Tobey's choices is not true?
B) Tobey must report $12,000 as income due to the receipt of the stock in the current year. Explanation: B) The ownership of the stock is substantially restricted (i.e. it will be forfeited if he leaves employment prior to three years). Unless he makes an appropriate election under Sec. 83, the income will not be recognized until his rights are fully vested.
31) An accountant takes her client to a hockey game following a business meeting. Because it is a playoff game, and the tickets were purchased that day, a premium was paid. The deduction for the tickets is limited to 50% of the face value.
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5) A nondeductible floor of 2% of AGI is imposed on unreimbursed employee business expenses, investment expenses, and many other miscellaneous itemized deductions such as tax preparation fees.
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80) Alex is a self-employed dentist who operates a qualifying office in his home. Alex has $180,000 gross income from his practice and $160,000 of expenses directly related to the business, i.e., non-home office expenses. Alex's allocable home office expenses for mortgage interest expenses and property taxes are $14,000 and other home office expenses are $9,000. What is Alex's total allowable home office deduction?
C) $20,000 Explanation: C) Expenses directly related to the business are all deducted before other (indirect) home office expenses. The other home office expenses are then deductible only if there is still net income ($180,000 - $160,000 = $20,000) from the business after the first expenses are deducted.
85) Sam retired last year and will receive annuity payments for life from his employer's qualified retirement plan of $30,000 per year starting this year. During his years of employment, Sam contributed $130,000 to the plan on an after-tax basis. Based on IRS tables, his life expectancy is 260 months. All of the contributions were on a pre-tax basis. This year, Sam will include what amount in income?
C) $24,000 Explanation: C) $130,000/260 months = $500 per month is excluded. $30,000 - ($500 × 12) = $24,000
59) Ron is a university professor who accepts a visiting position at another university for six months and obtains a leave of absence from his current employer. Ron spends the following amounts at the new location: Furnished apartment $ 4,800 Meals 3,000 Ron has AGI for the year of $100,000. Vincent's deductible travel expenses, after application of any relevant limitations, are
C) $4,300. Meals ($3,000 × 0.50) $ 1,500 Plus: Travel away from home: Apartment 4,800 Travel away from home 6,300 Minus: 2% of $100,000 (2,000) Deductible expenses $4,300
98) Tyne is a 48-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $61,000 in 2012. What is the maximum amount she may contribute to a tax deductible IRA?
C) $5,000 Explanation: C) Tyne is not an active participant in an employer-sponsored qualified retirement plan and therefore may deduct the full $5,000 limit.
77) Edward incurs the following moving expenses: Direct moving expenses $4,000 Indirect moving expense 6,000 The employer reimburses Edward for the full $10,000. What is the amount to be reported as income by Edward?
C) $6,000 Explanation: C) Only the $4,000 direct moving expenses are allowed against the $10,000 reimbursement. Therefore, Edward must report income in the amount of the excess reimbursement of $6,000 ($10,000 - $4,000).
54) In which of the following situations is the individual is an independent contractor rather than an employee?
C) a nurse who travels to several different patients. She sets her own hours and is responsible for the delivery of nursing care and end result Explanation: C) This nurse is not under supervision of an employer. The nurse sets her own hours and the delivery of care and the end result.
83) Characteristics of profit-sharing plans include all of the following with the exception of
C) the company must make contributions to the plan if it has profits during the year. Explanation: C) Annual employer contributions are not required under a profit-sharing plan.
32) If an employee incurs travel expenditures and is fully reimbursed by the employer, neither the reimbursement nor the deduction is reported on the employee's tax return if reporting is pursuant to an accountable plan.
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35) When a public school system requires advanced education for a teacher to continue employment, the teacher's expenses are a deductible education expense.
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38) In-home office expenses are deductible if the office is used exclusively on a regular basis as the principal place of business for any trade or business of the taxpayer.
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39) In addition to the general requirements for in-home office expenses, employees must also prove that the exclusive use of the office is for the convenience of the employer.
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4) An employer-employee relationship exists where the employer has the right to control and direct the individual providing services with regard to the end result and the means by which the result is accomplished.
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41) In-home office expenses which are not deductible in the year in which the costs were incurred due to limitations may be carried forward to subsequent years.
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64) Brittany, who is an employee, drove her automobile a total of 20,000 business miles in 2012. This represents about 75% of the auto's use. She has receipts as follows: Parking (business only) $500 Tolls (business only) 200 Repairs $1,000 Brittany's AGI for the year of $50,000, and her employer does not provide any reimbursement. She uses the standard mileage rate method. After application of any relevant floors or other limitations, Brittany can deduct
D) $10,800. Explanation: D) (20,000 miles × .555) + $500 parking + $200 tolls - $1,000 (2% of AGI) = $10,800. The cost of repairs would not be added to the standard mileage method.
100) H (age 50) and W (age 48) are married but only W is employed. She is not covered by a retirement plan at work. She earns $75,000 during the year and they have combined AGI of $78,000 before any IRA
D) $11,000. Explanation: D) Since neither is in a retirement plan at work, they may contribute $11,000 (a nonworking spouse may contribute $5,000 per year). Since H is age 50, he may contribute an additional $1,000. [($5,000 × 2) + $1,000] = $11,000.
86) Hunter retired last year and will receive annuity payments for life from his employer's qualified retirement plan of $30,000 per year starting this year. During his years of employment, Hunter contributed $130,000 to the plan. Based on IRS tables, his life expectancy is 260 months. All of the contributions were on a pre-tax basis. This year, Hunter will include what amount in income?
D) $30,000 Explanation: D) If amounts are contributed on a pre-tax basis, Hunter received a tax benefit when the contribution was made so all amounts are taxable.
96) Tessa is a self-employed CPA whose 2012 net earnings from her business (before the H.R. 10 plan contribution but after the deduction for one-half of self-employment (taxes) is $400,000. What is the maximum contribution that Tessa can make on her behalf to her H.R. 10 (Keogh) plan in 2012?
D) $50,000 Explanation: D) For 2012, the maximum earned income taken into account is $250,000 at a 20% net contribution rate results in a $50,000 maximum contribution.
99) Hannah is a 52-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $58,000 in 2012. What is the maximum amount she may contribute to a tax deductible IRA?
D) $6,000 Explanation: D) Hannah is not an active participant in an employer-sponsored qualified retirement plan and therefore may deduct the full $5,000 limit plus $1,000 because she is over 50 years old.
58) All of the following are allowed a "For AGI" deduction except:
D) Alison is an employee who is required to travel to company facilities throughout the U.S. in the conduct of her management responsibilities. She is not reimbursed by her employer. Explanation: D) Unreimbursed employee business expenses (Alison in "d") are from AGI deductions, specifically, miscellaneous itemized deductions subject to the 2% floor.
42) An employer receives an immediate tax deduction for pension and profit-sharing contributions made on behalf of employees.
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72) Matt is a sales representative for a local company. He entertains customers as part of his job. During the current year he spends $3,000 on business entertainment. The company provides him an expense allowance of $2,000 under a nonaccountable plan. How will Matt treat the $2,000 partial reimbursement and the $3,000 entertainment expense?
D) He will recognize $2,000 of income and deduct $1,500 as a miscellaneous itemized deduction, subject to the 2% of AGI floor. Explanation: D) Under a nonaccountable plan, the employee must include reimbursements in income. The qualifying expenditure can be deducted as an itemized deduction, but entertainment expense is reduced by 50% and then the 2% of AGI floor will apply to his total miscellaneous dedutions.
84) Ross works for Houston Corporation, which has a contributory defined contribution pension plan. The employer's monthly contribution to the plan is 8 percent of each participating employee's monthly salary, while the employee contributes only 6 percent. Ross's monthly salary is $3,000. Which of the following statements best describes the benefits of the plan?
D) The earnings on amounts contributed to the plan are not taxed to Ross until he retires or receives a distribution from the plan. Explanation: D) Amounts paid into a plan by or for an employee are not taxable until the pension payments are received, normally at retirement.
91) Martin Corporation granted an incentive stock option to employee Caroline on January 1, 2010. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Martin stock. Caroline exercised the option on August 1, 2012 when the stock's FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on September 5, 2013 for $350 per share, she must recognize (ignore alternative minimum tax)
D) long-term capital gain of $32,000 in 2013. Sales price of stock ($350 × 160 shares) $56,000 - Basis ($150 × 160 shares) - 24,000 Long-term capital gain $32,000
92) Jackson Corporation granted an incentive stock option to employee Caroline on January 1, two years ago. The option price was $150, and the FMV of the Jackson stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Jackson stock. Caroline exercised the option on August 1, 2012, when the stock's FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on July 5, 2013 for $400 per share, she must recognize
D) ordinary income of $16,000 next year and a short-term capital gain of $24,000 next year. Explanation: D) There is part ordinary income, part short-term capital gain since she didn't hold the stock the required holding period. Spread [160 shares × ($250 - $150) is ordinary income $16,000 Short term capital gain [160 shares × ($400 - $250)] 24,000 Total $40,000
82) In a contributory defined contribution pension plan, all of the following are true with the exception of
D) retirement benefits are a fixed amount based on the level of compensation earned by the employee during the working years. Explanation: D) Benefits are based on the value of the participant's account at the time of retirement.
88) All of the following characteristics are true of an incentive stock option with the exception of
D) there is no limit to the value of the options that become exercisable to an employee in a single year. Explanation: D) The value of the options that become exercisable in a single year cannot exceed $100,000.
6) Gambling losses are miscellaneous itemized deductions subject to the 2% of AGI floor.
F Explanation: Gambling losses are miscellaneous itemized deductions but are not subject to the 2% floor.
81) Charles is a self-employed CPA who maintains a qualifying office in his home. Charles has $110,000 gross income from his practice and incurs $88,000 in salaries, supplies, computer services, etc. Charles's mortgage interest and real estate taxes allocable to the office total $10,000. Other expenses total $14,000 and consist of depreciation, utilities, insurance, and maintenance. What is Charles' total home office expense deduction?
There were $24,000 of home office expenses, but the deduction is limited to $22,000. Explanation: C) Allowable home office expenses limited to: Gross income $110,000 Minus: Salaries, etc. ( 88,000) Equals: limit on remaining expenses $22,000 C) $22,000
43) In a defined contribution pension plan, fixed amounts are contributed based upon a specific formula and retirement benefits are based on the value of a participant's account at the time of retirement.
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44) A qualified pension plan requires that employer-provided benefits must be 100 percent vested after five years of service.
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46) Nonqualified deferred compensation plans can discriminate in favor of highly compensated executives.
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48) Employees receiving nonqualified stock options recognize ordinary income at the grant date or exercise date if there is a readily ascertainable fair market value.
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19) Transportation expenses incurred to travel from one job to another are deductible if a taxpayer has more than one job.
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2) If an individual is self-employed, business-related expenses are deductions for AGI.
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23) Self-employed individuals receive a for AGI deduction for 50% of entertainment expenses paid or incurred in the trade or business.
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14) If the purpose of a trip is primarily personal and only secondarily related to business, the transportation costs to and from the destination are deductible.
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15) Incremental expenses of an additional night's lodging and additional day's meals that are incurred to obtain "excursion" air fare rates with respect to employees whose business travel extends over Saturday night are not deductible business expenses.
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29) Incidental costs such as gift wrapping, mailing, and delivery of gifts are included in the $25 per donee limitation.
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1) Deferred compensation refers to methods of compensating employees based upon their current service where the benefits are deferred until future periods.
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10) Jason, who lives in New Jersey, owns several apartment buildings in Baltimore. His travel expenses to Baltimore to inspect his property are tax deductible.
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12) In determining whether travel expenses are deductible, a general rule is that if a person is reassigned for an indefinite period, the individual's tax home shifts to the new location and travel expenses are not deductible.
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13) Travel expenses related to temporary work assignments of one year or less are deductible.
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16) Travel expenses for a taxpayer's spouse are deductible if the spouse is an employee, the travel is for a bona fide purpose, and the expenses are otherwise deductible.
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17) Travel expenses related to foreign conventions are disallowed unless the meeting is directly related to the taxpayer's business or is employment related and it is reasonable for the meeting to be held outside of North America.
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